Wednesday, September 26, 2007

The Uranium Bull Market Keeps Getting More Bullish

China Demand for Uranium, World Growth in Electricity Demand to Drive Uranium Price Higher

Industry expert says all new production already factored in uranium price We are consuming far more uranium than we are producing worldwide, explained David Miller, Wyoming legislator and recently appointed president of Strathmore Resources (TSX-V: STM; OTC: STHJF.PK). All the new production is already factored into the future market for uranium. Were underwater right now without building one more nuclear power plant. Nuclear reactor requirements have far outstripped current mining production (see chart below) for the past two decades. Current worldwide production is more than 80 million pounds, but the demand for uranium, which fuels nuclear reactors, is running an annual deficit of approximately 60 million pounds.

According to a World Nuclear Association report on uranium supply, published this past September:

the world's present measured resources of uranium in the lower cost category (3.5 Mt) and used only in conventional reactors, are enough to last for some 50 years Further exploration and higher prices will certainly, on the basis of present geological knowledge, yield further resources as present ones are used up so a significant increase in exploration effort could readily double the known economic resources, and a doubling of price from present levels could be expected to create about a tenfold increase in measured resources, over time.

Electricity: Uraniums Supply and Demand Problem

Were not going to run out of uranium, but where will the price go to encourage new production? asked David Miller. We are around over $33/pound now. Could it double again? It wouldnt surprise me at all. Kevin Bambrough, a research analyst for Sprott Asset Management, heartily agreed with Mr. Miller, saying, We have just started a long term uranium bull market that will end in a uranium mania as utilities and countries drive uranium prices to unbelievable highs as they compete to secure supplies."

That driving force is demand for more electricity. Over the past 25 years, total world energy use expanded by almost 50 percent, with stronger growth in electricity usage. Demand for electricity is increasing far more rapidly than overall energy use. Electricity demand has been projected to grow 2.8 percent annually through 2010, and substantially more between then and 2020. About 2 billion people currently have no electricity access, and with United Nations forecasts of world population growth by 1.5 billion people in 2020, electricity demand will continue to grow.

As an interim solution to the greenhouse gas problem and climate changes (e.g. the worst Atlantic hurricane season since record-keeping began), a growing number of countries are investigating nuclear energy to solve their burden of a soaring electrical demand. Presently, there is as much electricity generated by nuclear power as was provided by all sources worldwide in 1960.

Nuclear power generates more than 16 percent of the worlds electricity, nearly 24 percent of the OECD and 34 percent of the European Unions electricity needs. In an April 2005 speech to the National Small Business Conference in Washington, President Bush announced, Nuclear power is now providing about 20 percent of America's electricity, with no air pollution or greenhouse gas emissions. Nuclear power is one of the safest, cleanest sources of power in the world, and we need more of it here in America.

Demand for electricity is projected to impact other commodities as well, not just the price of uranium. In the Energy Information Agencys Annual Energy Outlook 2005, U.S. electricity demand will bring about increases in natural gas consumption. By 2025, the electric power sector will account for 31 percent of total demand for natural gas, as consumption increases from 5.0 trillion cubic feet in 2003 to 9.4 trillion cubic feet in 2025.

Chinas Demand May Be Greater Than Anticipated

Today, 441 nuclear power reactors in 31 countries provide more than 16 percent of the worlds electricity. In 2003, that was 2525 billion kilowatt hours. Eleven countries are constructing thirty more reactors, mainly in China, but also in Russia, Japan and Korea. The International Atomic Energy Agency has projected at least 60 new power plants will be constructed over the next 15 years. By 2020, nuclear powers electricity production share will increase to 17 percent.

China is the future wild card, said Miller. Their current uranium demand is miniscule. They have a small nuclear industry. They may have three or four thousand megawatts of capacity. Their uranium demand is only about 4 or 5 million pounds per year. They meet that internally from their own uranium deposits. But what they are planning for nuclear is probably the most aggressive program in the world. I visited China in 2003 to teach ISL (in situ leaching) uranium geology and ISL mining techniques to a couple of institutes. At that time, they were talking about building two new nuclear power plants per year for the next 20 years.

But as Miller observed, they may have more ambitious plans. He added, Since then, I have heard of more aggressive programs. One article I read recently was entitled, Let 1000 Reactors Bloom. That is more than 200 percent of the nuclear reactors we now have on earth. I believe that is what the Chinese will be doing in the next 40 50 years, converting nearly 100 percent of their electrical generation from nuclear power. Currently, China is generating less than three percent of their electricity from nuclear energy.

Miller speculates of how this might impact the price of uranium, If they are building nearly three times the world fleet in just China, then that would be about 500 million pounds of uranium demand from China in fifty years. Other companies are announcing new nuclear power plants. What does that mean for the price of uranium? Miller concluded, So, the demand for uranium is going up. I think the growth in demand will be more rapid than we realize.

Uranium Mining: A Slow Process

David Miller, who was previously interviewed by StockInterview.com in June 2004 (view article), reflected on last years forecast, I thought $30/pound was sufficiently high to encourage enough new production around the world. But there are major issues with supplying the increasing appetite of the burgeoning nuclear power industry. Miller warned, The problem with encouraging new production is you dont turn these things on and off. The only uranium, coming onto the market in addition to whats already planned right now, will come from the already-discovered deposits.

Two years from now, Miller thinks the spot price of uranium could double again. There are going to be a lot of people trying to put uranium mines into production, but it is not an easy process. Permitting requirements in countries where most uranium is mined are roughly comparable. If you havent done any work, after a discovery, it still will take about four to six years to mine in any of those areas.

In early 2004, there were probably less than twenty uranium producers and exploration companies. Since then, the number of uranium exploration companies has jumped to more than 200. Miller warns investors that it could take up to 12 years for a grass roots project to begin mining yellowcake. Miller explained, Starting, finding, permitting and mining a project is probably going to take a minimum of 12 to 20 years. From the start of the exploration program to defining the ore body, after you make a discovery, to starting the background and permitting process, to development and then finally mining its going to take a long time.

Through 2005, many uranium exploration companies announced new projects throughout Canada and the United States. Miller did not see how their efforts would immediately alleviate the uranium supply crunch, If you are talking about any of those, such as in Labrador or the Yukon or in the basins outside the Athabasca Basin, or even within the Basin, for those that are just now doing their first exploration, you are talking the year 2020 before those could come online and supply uranium to the world market.

But, what about the worlds richest concentrations of uranium in Canadas Athabasca Basin? Will they help stem the rising uranium price? In a nutshell, Miller says no. He explained, The next one to come online is Cigar Lake, but it was discovered over 20 years ago. Cigar Lake may come online in 2007 or 2008. There is another one called Shea Creek, which was discovered by Cogema more than a dozen years ago. They are having some very good results on that. Could they start the permitting process on that one in the near future? Absolutely, Miller responded. But you are talking about 8-10 years before that one could come online. It might be close to 2015 before it could bring any uranium to the world market.

The future largest producing uranium mine in the world is likely to be Olympic Dam in Australia. Its basically a copper mine with uranium grades. On October 27th Hong Kong-based institutional advisor Marc Faber, and author The Gloom, Boom and Doom Report, told Dow Jones newswire that he thought copper prices would fall by as much as 40 percent. (Note: Marc Faber also said, Id be a physical buyer of uranium.) What happens when copper is $0.50/pound? What will be their cost of producing that uranium? asked Dave Miller. Olympic Dam is low grade uranium, less than 0.05 percent U308. Their cost to operate the uranium portion of that will go up, if copper prices go down. It would make their cost higher, and they would be less inclined to sell it at a low price.

Where else do utilities turn for their growing uranium needs? There are big known deposits in Australia, and one that has hundreds of millions of pounds of uranium in it. But, it happens to be adjacent to, and possibly partly in, one of Australias national parks. In other words, utilities are likely to be paying more for their uranium as this decade progresses.

David Miller argues that some of that uranium production is likely to come from the smaller, but well-capitalized, companies, such as Strathmore Minerals. Our strategy from day one, and we havent veered from this at all, has been to acquire as many known uranium deposits as we possibly could, explained Miller. We started early in this uranium cycle in 2003. We were out there before 95 percent of these other uranium companies even thought of starting uranium companies. We were able to pick up some very good deposits in New Mexico and Wyoming. These are known, drilled-out uranium deposits in the country thats produced as much as uranium anywhere else on earth. Weve taken all that exploration information, where they discovered these old deposits, and have acquired a number of those old deposits. Now, we have opened a permitting office in New Mexico and starting the permitting process to put those into production, somewhere down the road. We dont know if we can do it in four years or six years. Its a long process and all kinds of studies must be done to get these fully permitted and into production.

But there is a second part to the Strathmore Minerals strategy. Miller announced, Dont ignore the richest uranium province on earth, which is the Athabasca Basin in Canada. Strathmore is the Number One landholder in the Athabasca Basin., even larger than Cameco. We control approximately 3 million acres in Canada, and nearly all of that is in the Athabasca Basin. We have dozen different individual projects in the Basin. We are starting the exploration process on all of those. As I said earlier, exploration takes a long time. We have not made any discoveries yet, and it may be three to five years before we make a discovery.

The case with Cameco (NYSE: CCJ), the blue chip publicly traded uranium producer, may also help fuel uranium prices rally to higher levels. They have forward sold their production. Added Miller, I would bet their average sales price, under contract right now, of the 20+ million pounds they deliver every year is somewhere in the low teens maybe $13/pound plus/minus $1-2. As these contracts mature, and bring on new contracts, that price is going to keep going up, but lag the market. They should keep going up for the next five years.

And that should summarize why uranium prices are unlikely to suffer a down cycle over the next several years.

The Case for Nuclear Energy

As electricity demand grows by leaps and bounds during the 21st century, many of the worlds governments are seriously considering nuclear energy as a safer alternative to coal-fired plants. As many study the safety issues of nuclear-powered electricity, they tend to conclude that nuclear energy may very well provide a healthier, as well as a less expensive, alternative to present power generation methods.

Miller pointed out, In the 1970s, when the anti-nuclear movement was very strong, the U.S. was then mining and burning 600 million tons of coal each year. And now, thirty years later, because the anti-nuclear industry was successful, we are burning 1 billion tons of coal per year, a 50 percent increase in the amount of coal we burn in this country.

According to the Environmental Protection Agency, U.S. air pollution in 1999, as a result of energy from coal, emitted more than 13 million tons of sulfur oxides and nearly 5.5 million tons of nitrous oxides. In a Harvard School of Public Health study, as many as 70,000 Americans are dying each year as a result of air pollution. From sulfur dioxide alone, Harvard estimated that 2400 Americans die for every million tons of sulfur dioxide emitted, or more than 30,000 American deaths annually.

But, air pollution is far worse elsewhere. The pollution levels in China from Shanghai to Beijing are shocking, said Miller. Emphysema kills 5,000 people per year in the coal mines. They need nuclear power, probably more than any area on earth, to clean up their air.

About David Miller:
David Miller, P. Geol.
President & COO, Strathmore Minerals Corp.

David worked for over 20 years with Pathfinder Mines Corporation/Cogema, the second largest producer of uranium in the world, the last 4 years as its chief geologist for in-situ operations in the US. Mr. Miller has over 25 years of experience in the exploration and acquisition of uranium properties. He has also consulted in uranium exploration, mining, and "in-situ" recovery for the International Atomic Energy Agency (IAEA) in Vienna. In association with the IAEA, David also taught uranium geology, exploration and ISL mining practices at the Beijing Research Institute of Uranium Geology and Mining. Mr. Miller is also an elected member of the Wyoming Legislature. His committee assignments include the Minerals and the Energy Council. Mr. Miller has been the key architect behind the Strathmore Mineral Corp's property acquisition strategy in the U.S. in identifying drilled out in-situ leach recoverable uranium properties in Wyoming and New Mexico.

November 16, 2005
By James Finch
StockInterview.com

COPYRIGHT 2007 by StockInterview, Inc. ALL RIGHTS RESERVED.

James Finch contributes to StockInterview.com and other publications. StockInterviews Investing in the Great Uranium Bull Market has become the most popular book ever published for uranium mining stock investors. Visit http://www.stockinterview.com